Smart Moves In Home Loan Market

Source : The Business Times, April 17, 2008

PERHAPS US Federal Reserve chairman Ben Bernanke can take a leaf from our local bankers when it comes to his nation's sub-prime home loan borrowers who are struggling to meet higher instalments after lenders reset their interest rates higher.

Recently United Overseas Bank (UOB) launched a home loan package called UOB Clear where borrowers can fix their instalments for a three-year period, regardless of interest rate movements.

If the interest rate goes down, more of the principal would be paid off. And if interest rates move higher, a higher amount of the instalment would be used to pay the interest portion.

Fixing the instalment for 36 months is pretty radical, and unheard of, even without the volatility in interest rates.

But customers who use their Central Provident Fund (CPF) money to pay their home loans will appreciate the convenience since it is a hassle to inform the CPF board each time the instalment amount changes.

UOB is banking on the extra service it is offering to retain existing customers, as well as to get new ones.

Banks have been pretty creative in looking for ways to both retain and attract new home loan customers as refinancing has become the only game in town amid a dearth of new home sales.

Mortgages as a product, while low margin, is also relatively risk-free in Singapore, provided the economy continues to enjoy full employment, as it should given the strong economic growth momentum of the first quarter.

The economy surprised with a robust 7.2 per cent gain in the first quarter, against 5.4 per cent in the fourth quarter of last year.

Savvy borrowers who have begun shopping around for cheaper home loans in light of falling interest rates may also have come across a new feature offered by DBS Bank. One of its packages which pegs the interest rate to the 12-month Sibor, or the interbank interest rate, offers two free repricings within 24 months.

With DBS's huge customer base, it frees its bankers from having to negotiate with impatient borrowers every time interest rates fall. The projection is that the key interest rate here will fall to below one per cent before the year is out. The 3-month Sibor yesterday was 1.36 per cent.

The penchant for home loan borrowers to switch banks every two or three years, especially once the lock-in periods are over, is a constant headache faced by bankers here.

Local banks have a harder time in a falling interest rate environment given their much bigger customer bases.

Even borrowers still within their lock-in periods are demanding their banks reprice their loans lower. Bankers explain that this is a losing proposition because they had secured the funding cost for the existing loan at an earlier higher price. But in the same breadth, they will offer to pay the penalty to lure new refinancing customers from a rival.

Still, the penalties worked into each package actually ensures that banks don't lose out when customers jump ship.

The market is tough but standing still is just not an option.